How to read company reports like a pro

Every quarter, companies release an earnings report, which tells investors how it performed over the last three months. The report breaks down the company’s revenue, earnings, dividends and other metrics. Some companies also issue annual and half-year reports but we’ll focus on quarterly earnings here, since they’re the most likely to move stock prices.

Why are quarterly company reports such a big deal?

They’re the best way to gauge the financial health and future of a company. And it’s the most consistent source of information available. Most  companies publish their earnings reports in the same period – usually in January, April, July, and October. (Though this largely depends on the company’s fiscal or financial year, which doesn’t always follow the calendar year.) This means trading volume and volatility are likely to increase in these months, and that yields a lot of investment opportunities!

Usually, we have a rough idea of what to expect during earnings season. Most companies provide a forecast for future earnings ahead of the big event (known as ‘guidance’). Financial analysts also make their own estimates based on data they have available. These estimates are often priced into the stock. The market tends to focus on whether the company misses, meets or beats these expectations. As a result, a company’s stock can fluctuate wildly on the day its earnings report is released. It’s not unusual to see shares soar or plummet up to 20% on these days!

How to read quarterly company reports like you’re Warren Buffett

Company reports can be pretty dense. They’re usually long, boring and full of jargon. But if you know what to look for, they can be a great way to get an edge over other investors. You won’t become a financial analyst overnight, but you can learn how to scan through them to find the most important parts. So here’s our quick guide which will break down the critical indicators to focus on; where to find them; and most importantly, how to interpret them:

1. Revenue

Whether you call it revenue, sales or top-line, this tells you the total turnover of the company. Or to put it simply, the amount of money it brought in for the quarter. If it’s too low, the company could struggle to cover costs and expenses. So obviously, investors like to see year-over-year growth here.

2. Net profit

This is what’s left after the company has paid for all costs and expenses. You’ll find it at the end of the income statement, right at the last line. (That’s why it’s often referred to as a company’s ‘bottom line.’) It gives investors a good picture of a company’s operating efficiency and how profitable it is compared to its peers.

3. EPS

EPS stands for earnings-per-share. It’s a good indicator for how profitable a company is. EPS is calculated by dividing the company’s net profit by the number of outstanding shares. A high number suggests that a company is strongly profitable, and could pay out a large amount of profits per shareholder.

4. Other metrics

The three metrics described above are important for every business. But there are also company or sector-specific factors to consider.

A quick example: for relatively young tech companies like Twitter or Snap, shareholders are more interested in growth than net profits or EPS. So they focus on metrics like subscribers or daily active users. This helps them understand both the current market and the future potential of such companies.

All About The Expectations

Now you know the key metrics to look for in a company’s earnings report. But the numbers alone don’t move share prices. Sometimes a company can post double-digit revenue growth and, yet, investors could still react by selling their shares.

Why? It all comes down to expectations.

During every earnings season, financial analysts at banks and rating agencies go through all the data and set expectations. They make estimates of profit, revenue and other growth metrics to give their forecast of earnings. By averaging out all of these forecasts, you get the “consensus.”

Then, when the quarterly report comes out, investors don’t just compare the numbers to last year’s figures. They compare them to the expected numbers. If they beat expectations, the stock is likely to go up. But if they’re lower than forecast, you can bet a selloff will take place.

Need a Little Guidance?

Some companies also offer their own estimates for the coming quarter, known as ‘guidance.’ While companies are not legally obligated to provide guidance, some do. It’s a way to manage shareholders’ expectations and avoid any nasty surprises in the actual earnings announcement.

There you have it! Now you know the basics of company reports and you can focus on the main metrics without getting lost in the deluge of data. That should help you make a more informed decision about whether to invest in a particular stock or not.

If you want to learn more about earnings season, read our other articles on this important time period for investors:

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All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

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